Canadian stock market rally seen cooling in 2015: Reuters poll

TORONTO (Reuters) - Canadian stocks are expected to build on gains that already took the broad market to a record high this year, but they may lose momentum in 2015 as weaker commodity prices and a sluggish domestic economy take hold, a Reuters poll found.

Toronto Stock Exchange’s S&P/TSX composite index will reach 15,500 by the end of the year, up about 14 percent from the end of 2013 and a gain of just around 3 percent from Wednesday’s close, the poll showed.

The median forecast in the poll of 41 market analysts and strategists taken over the past week showed the TSX then rising about 6 percent from where it is now to 16,000 by mid-2015.

The Canadian benchmark index has been one of the best performers among its global peers this year, rising about 11 percent and repeatedly hitting all-time highs.

While markets have benefited from loose monetary policies from global central banks, improving macroeconomic conditions and low volatility, uncertainty remains about when the U.S. Federal Reserve will raise interest rates.

“I would think that there’s still room for the TSX to move higher,” said Craig Fehr, Canadian market strategist at Edward Jones in St. Louis, Missouri.

“Overall all the pieces still remain in place to power stock markets - and that would be an economy that continues to improve in the U.S. and Canada and perhaps more modestly around the world, and corporate profits that are on pace to move to all-time highs.”

Another factor working in the Canadian market’s favor is the outlook for global growth, which is expected to pick up steam in 2015.

But some analysts and portfolio managers are starting to fear that the recent stock performance might have outrun earnings fundamentals. The TSX is trading at a price-to-earnings multiple of 18, compared with 18.9 for the S&P 500, according to Thomson Reuters data.

“Earnings are expected to slow down next year. So it’s hard to justify a screaming multiple for the TSX,” said Elvis Picardo, strategist and vice president of research at Global Securities in Vancouver.

“Next year we could have some renewed concern not so much about the global economy but about Canada,” he added. “2015 may be a year we may see a resurgence of concern about the housing market in Canada, just given the fact that it’s been on such a tear.”

The Canadian Real Estate Association said earlier this month that sales of existing homes in Canada will peak in the third quarter and decline in 2015, even as it provided data showing sales rose in August to their highest level since January 2010.

The average home price has boomed, doubling over in the past decade. So far, Canada’s housing market has managed to dodge a U.S.-style plunge where prices fell by more than a third and left millions of Americans in negative equity.

But chances of a steep fall in Canadian home prices have increased, according to property market analysts polled by Reuters last month. [CA/HOMES]

Should home prices indeed decline significantly, it would affect profits at real estate investment firms. These companies, along with other financial service providers, account for over a third of Canada’s benchmark index, according to Reuters calculations.

Another risk for the resource-sensitive Canadian market will be choppy commodity prices.

Oil prices are at their lowest in about 18 months because of sluggish demand and increasing supply, and they have helped drag down shares of the heavily weighted energy sector. Bullion prices have been slumping to 8-1/2-month lows because of a stronger U.S. dollar, hitting shares of gold miners.

“Resources are going to be a drag,” said Gavin Graham, chief strategy officer at Integris Pension Management Corp. “It’s difficult to see the TSX making much progress until we get an indication that economic growth is starting to improve in major emerging markets such as China.”

Data from the world’s second-biggest economy has been a mixed bag. Figures released this week showed China’s manufacturing sector rebounded slightly in September but factory employment dropped to a 5-1/2-year low.